The concept of financial innovation has an image problem – especially in America. After “black hat” innovations like subprime securities helped crash the global economy in 2008, former U.S. Federal Reserve Chairman Paul Volcker famously asserted that the only financial innovation that has improved society is the ATM machine. And many still feel that typical financial service providers only innovate with profit in mind – regardless of the impact on consumers.
Anyone who attended last week’s EMERGE: The Forum on Consumer Financial Services Innovation could tell a different story. The event brought together hundreds of entrepreneurs and thought leaders to discuss how the industry can use (and is already using) cutting edge technology and behavioral science to improve customers’ financial lives – without losing sight of the bottom line. We’ve put together some highlights below:
A new paradigm
Perhaps the most stirring – and potentially significant – presentation of the conference came from Dan Schulman, American Express’ group president, enterprise growth. He discussed the company’s efforts to transition from being an exclusive, aspirational brand to being an inclusive, welcoming one. This shift has involved products like Serve, a low-fee prepaid card, and Bluebird, a no-fee alternative to checking accounts – both of which can be accessed at Walmart and other low-cost retail chains around the country.
The company’s goal is not only to open its doors to low-income customers, Schulman explained. It's also to raise public awareness of the ways ordinary people are struggling to get by, and to help shift the paradigm in the industry toward expanding financial inclusion for all Americans. “Fundamental changes are sweeping through the financial services industry, crashing down on our models,” he said. “We’re just at the starting line, but I believe we are at a tipping point right now. No one organization or company can do this alone, but together we have a moral obligation to reimagine financial services, bringing people from the margins to the mainstream of finance.” We’ll discuss the implications of this approach in much more detail in an upcoming post.
Based on their income and material wealth, “The American poor, in India, would be middle class,” said Princeton psychology professor Eldar Shafir in a fascinating keynote address. “But it’s very easy to be psychologically poor in America today. You don’t have to be starving, you just have to have too little to get the things you need to live.”
The concept of psychological poverty formed the basis for the much-discussed book Shafir recently co-authored: “Scarcity: Why Having Too Little Means So Much.” It also provided context to many of the conference’s discussions. The feeling of scarcity exacts a high psychological toll, Shafir explained. The result: “The poor not only lack money, they lack mental bandwidth. Their cognitive capacity is loaded. And being poor in bandwidth can look a lot like being poor in money.” Among other things, it can lead to a behavior called “tunneling” – in which low-income people use their limited attention to focus on their most urgent needs. This can lead to missed bill payments, bounced checks, weaker willpower, and even to lower IQ – all of which help perpetuate the feeling of scarcity in a vicious circle. During the presentation and later discussions, you could almost sense the audience’s mental gears turning as they considered the implications of scarcity for financial services.
American Express wasn’t the only major financial player to discuss new products for low-income customers. Kevin Condon, senior vice president, deposit products at Bank of America, discussed Safe Balance, a low-fee account that provides checking-like features while helping customers avoid overdrafts. Safe Balance includes a debit card, online bill pay features, ATM access, online and mobile banking – but no check writing ability and no overdraft fees (overdrawn transactions are simply declined and returned unpaid). The product has a stable maintenance fee of $4.95 a month. “We avoid surprise ‘gotcha’ fees,” Condon said, “to regain customer trust.”
“We found that there was a group of customers in the low- to moderate-income segment that wanted ‘protection from themselves,’" he explained. “They would get unexpected financial incidents that led to a downward spiral – car repairs, medical bills, etc. So they’d overdraft and incur a fee, which would put them in the hole each month, and they’d struggle to get out.” Bank of America even monitors its existing customers’ account usage to identify those who are having trouble with frequent overdrafts. “We identify those who get into a downward spiral due to fees, and recommend SafeBalance,” he said. The product seems to have found a market; customer response has been strongly positive, Condon said, and competitors are emerging in the space.
There’s also a growing movement toward more comprehensive research of low-income consumers’ complex financial lives. One particularly promising example is the U.S. Financial Diaries Project, which has tracked the multifaceted financial lives of more than 200 households over the course of a year. “It’s time to question the assumptions we make about low-income consumers,” said Brandee McHale, chief operating officer of the Citi Foundation. “The Diaries are designed to make us think about those assumptions that may not be true.” Researchers gave a preview of the project’s findings, and we’ll be covering them in much more depth in the coming months as the data is released.
In the U.S., 18-25 year olds comprise the fastest growing segment for bankruptcy. Unfortunately, it isn’t easy to teach dry money management concepts to teenagers. Ted Gonder, the CEO of MoneyThink, described how his organization has found a way. MoneyThink offers high-schoolers a near-peer financial capability mentorship program, taught by students from local universities. It peppers lessons with pop culture references, using things like the Kardashian sisters’ financial mishaps to illustrate the importance of sticking to a budget. And not surprisingly, it makes full use of smartphones to help students apply in-class lessons to real life – and even to engage with other students via a finance-focused social media app. “Older adults won’t even tell their salaries to others, but our students are constantly telling people about how much they receive, spend and lend to each other,” said Gonder. “This is a generation that shares selfies taken in their bathroom mirror 24/7. So if they’re already social about money, why not make a social media app that expands on that?”
Another panel discussed a population that can be even trickier to serve financially – immigrants, including those who are currently undocumented. It’s a market that’s fraught with challenges – like language barriers, lack of valid ID and mistrust of government and financial institutions. But it’s also one whose unique needs could present opportunities for better services – like affordable products for sending money home, or for managing unpredictable or seasonal income flow. And if immigration reform passes, the undocumented might find themselves with a new financial need, as the fees involved in normalizing their immigration status could drive many toward financial services, either formal or informal. That could present a risk, said Eric Rodriguez, vice president, Office of Research, Advocacy, and Legislation at National Council of La Raza. “There are a lot of predators out there ready to jump in and exploit the community, and set them back a long way. How can we prepare to serve the needs of a legalized population? Because with immigration reform, it’s not if – it’s when.”
“Nowhere is financial innovation more alive today than in innovations for the emerging middle class,” said Brett Adams, lead, U.S. Prepaid Products, MasterCard Worldwide. The conference featured plenty of companies and products that back up that claim – a few examples:
Blossom, which helps facilitate remittances and micropayments by letting users purchase digital currency instantly with a credit card, a bank's online bill-pay or a mobile phone, withdraw cash from their digital currency portfolio at any ATM, and spend it wherever Visa is accepted.
DealStruck, which helps the millions of small business owners among America’s low- and middle-income population get fast access to credit, based on their business cash flow, not their personal credit rating.
Moneyworks, which helps users spend efficiently by analyzing their personal budgets and financial goals, then sending them real-time notifications via mobile that detail how much they can spend on upcoming purchases – and directing them to nearby retailers whose products fit their budget.
Entrepreneurial Finance Lab, which uses psychometric analysis of entrepreneurs’ character, abilities and attitude to help lenders and investors identify low-risk, high-potential small business owners – in spite of their lack of a strong credit history.
Revolution Credit, which offers software to financial service providers that builds engaging online financial capability programs into the transaction process, helping customers manage their money – and giving banks more data on their financial needs.
As EMERGE concluded, it was hard to avoid a sense of optimism about what the financial industry could be capable of if it puts its full energies toward serving the underserved. If these trends continue, financial innovation could finally shed its negative connotations in the U.S. – perhaps even changing public perceptions of the industry at large.
Maybe Paul Volcker should attend next year’s conference.